Relaxing controls may lead to money laundering
MUMBAI: Regulators have halted the establishment of investment funds by local family offices in Gujarat’s new finance hub due to concerns that these arrangements could be exploited to evade taxes and circumvent capital controls, according to sources familiar with the matter.
The regulator for Gujarat International Finance Tec-City (GIFT City) has suspended approvals for family investment funds following feedback from the Reserve Bank of India (RBI), the sources said, requesting anonymity due to the sensitivity of the issue.
The RBI is concerned that relaxing capital controls for such instruments could create loopholes for money laundering, they added.
One-stop destination
This decision could undermine GIFT City’s ambitions to become a one-stop destination for wealthy individuals seeking overseas investments.
Located in Prime Minister Narendra Modi’s home state of Gujarat, the finance hub was conceived as a free-market zone, designed to operate with fewer restrictions on taxes and capital flows.
In January, GIFT City’s special economic zone granted its first in-principle approval to billionaire Azim Premji’s family office for overseas capital investments, raising the hopes of many other applicants, as previously reported by Bloomberg News.
Moving to Singapore and Dubai
However, with no final approvals since then, family funds are now exploring options to set up investment offices in countries such as Singapore and Dubai, the sources said.
Representatives for the International Financial Services Centres Authority (which governs GIFT City), the RBI, and Premji’s office did not respond to emailed requests for comment.
India enforces strict regulations on capital outflows, capping overseas investments by residents at $250,000 annually.
This limit covers the purchase of property, investments in shares and securities, and the establishment of joint ventures or subsidiaries.
Resident Indians can make overseas investments through instruments offered by global banks and wealth advisors, such as HSBC Holdings Plc, 360 One WAM, and Nuvama Wealth Management, within GIFT City.
Aims to close loopholes
The recent move by the regulator aims to close potential loopholes that could have allowed resident Indians to transfer more capital abroad than permitted, according to the sources.
This decision comes as India experiences a wealth boom, being the world’s fastest-growing major economy.
The number of individuals with assets exceeding $30 million is projected to grow by 50 per cent between 2023 and 2028, according to a Knight Frank wealth report.
As these wealthy individuals seek to diversify their investments, they have become prime targets for banks eager to manage new capital.
